In the matter of Trinco (NSW) Pty Ltd (in liq) [2025] NSWSC 993, the New South Wales Supreme Court found Mr Azizi to be a de facto director of Trinco (NSW) Pty Ltd (in liq) (Trinco) and liable for insolvent trading. Trinco’s liquidator was awarded compensation, payable by Mr Azizi.
This decision underscores that individuals exercising real managerial control, even without formal appointment as directors, may be deemed de facto directors and held personally liable for insolvent trading. With the increase in the number of companies in Australia in liquidation, especially in the construction sector, those operating behind the scenes (even as employees) must be clear about the demarcation of their role and or adopt rigorous financial oversight and governance practices to mitigate exposure to claims under section 588M of the Corporations Act 2001 (Cth) (Act).
Case Background
Trinco operated as a management company for Trinity Construction (Aust) Pty Ltd (Trinity). Mr Azizi was the sole registered director of Trinity; he was not a registered director of Trinco, nor was he ever formally appointed as such. Ms Azizi, Mr Azizi’s sister, was the secretary, sole director and sole shareholder of Trinco. Trinco functioned primarily as a vehicle to support Trinity’s construction projects, including entering contracts with subcontractors and suppliers.
Expert evidence accepted by the Court established that Trinco was insolvent from 1 July 2018 and remained so until its winding-up on 9 December 2021. From mid-2018, Trinity was failing to provide sufficient funds to Trinco resulting in Trinco’s growing inability to pay creditors and meet financial obligations as and when they fell due.
On 3 June 2021, Mr Henry McKenna was appointed as administrator of Trinco and on 9 December 2021 he became the liquidator of the company. Mr McKenna, on behalf of Trinco, exercised his power to commence proceedings against Mr Azizi, seeking to make him personally liable for the debts incurred by Trinco after the date of insolvency ($11,569,676). The categories of the alleged debts included: debts for the provision of services or supplies supported by a proof of debt; debts recorded by Trinco in MYOB; debts to the ATO; debts pursuant to court orders and judgments; debts pursuant to settlement agreements; and debts arising from subcontract agreements.
The dispute was about whether Mr Azizi was liable for insolvent trading under section 588M of the Act, and the following issue arose for determination:
- Whether Mr Azizi was a de facto director of Trinco under section 9AC(1)(b)(i) of the Act;
- Whether there were reasonable grounds to suspect insolvency under section 588G(1)(c) of the Act;
- Whether Mr Azizi failed to prevent Trinco from incurring debts in breach of section 588G(2) of the Act; and
- Whether the relevant debts were wholly or partly unsecured at the time loss was suffered under section 588M(1)(c) of the Act;
- Whether the quantum of compensation sought should be awarded.
The Supreme Court’s Decision
De Facto Director: Top-level Management Power in the Company
A person, although not formally appointed as a director, may be a ‘de facto’ director if they act in the position of the director. It is objectively analysed by the courts to determine whether the person exercises top-level management power in the company. If the court is satisfied that the person exercised such power, the person will be a director even if not formally appointed by the company.
Mr Azizi was found to be the ultimate decision-maker of the key management decisions in Trinco. Notably, it was Mr Azizi who decided Trinco’s business model to operate as a vehicle for running Trinity’s projects. Furthermore, the ultimate decision maker in Trinco was Mr Azizi in relation to the negotiations with creditors, dispute management and the selection of subcontractors and suppliers. There was no person in Trinco who had a greater authority than Mr Azizi to make a management decision. Ultimately, the Court found Mr Azizi to be a de facto director of the Trinco.
Section 588M gives a liquidator or creditor the right to recover losses from a director if the director fails to prevent the company incurring debts when the company is insolvent or would become insolvent. Relevantly for the purpose of this article, sections 588G(1)(c), 588G(2) and 588M(1)(c) will be analysed.
Reasonable Grounds for Suspecting the Company is Insolvent or Would Become Insolvent: Section 588G(1)(c)
Section 588G(1)(c) of the Act requires proof that at the time that a company incurs debt, there are reasonable grounds for suspecting the company is insolvent or would become insolvent as a result of incurring that debt. Suspicion alone is sufficient to establish there are reasonable grounds for suspecting the company is insolvent. The person does not need to conclude that the company is insolvent or would become insolvent – they need only suspect one of those states. This is an inquiry into the objectively formed state of mind of a person in ordinary competence, who is diligent and seeks properly to perform his or her duties as imposed by law and can reach a reasonably informed opinion on the company’s financial position. If a suspicion can be proved to have existed, the court will find that section 588G(1)(c) is satisfied.
In this case, the Court concluded there were reasonable grounds to suspect that Trinco was insolvent or would become insolvent because Trinity’s payments to Trinco were the only resource of funds Trinco had and Trinity did not provide sufficient funds to Trinco to enable Trinco to pay its debts as and when they fell due.
Failing to Prevent the Company from Incurring Debts: Section 588G(2)
An essential ingredient in finding a director liable for insolvent trading, is that the director was aware at that time of grounds for so suspecting the company’s insolvency, or a reasonable director “in a like position” would be so aware.
In this case, the Court carefully considered the position of a reasonable director “in a like position”. The Court emphasised that the phrase, “in a like position”, requires an objective assessment of the director’s role and responsibilities, having regard to the specific context of the company’s management structure, the allocation of powers and the director’s own skills and expertise.
The Court held that a reasonable person in Mr Azizi’s position – despite his construction background – would have recognised Trinco’s insolvency, given his ultimate control over both Trinity and Trinco. By mid-2018, Trinity was already failing to fund Trinco’s debts, and instead of stopping further liabilities being incurred, Mr Azizi continued to take on new projects in the name of Trinco. This strategy effectively shifted the financial risk onto subcontractors and suppliers, causing significant losses to small creditors who should not have been forced to finance the group’s attempts to trade out of insolvency.
Although Mr Azizi did not rely on section 588H(5), a defence of taking reasonable steps to prevent the company from incurring the debts, Brenton J provided some observations on the provision which will be instructive for future cases and litigation strategy.
A person will not breach section 588G(2) if they can prove all reasonable steps have been taken under section 588H(5). However, the court will carefully determine whether the approach taken by the director was reasonable. The Court remarked that directors should inform themselves about the reasonable steps defence, the practice of the company, and how their management power was exercised. A good record of any approach they took for the company should be kept and evidence should be carefully collected.
Brenton J observed that Mr Azizi’s reliance on informal measures – such as advising reduced spending, seeking professional advice, and reviewing contracts – was insufficient to be considered as reasonable steps if Mr Azizi invoke the defence under section 588H(5). Given that Trinco incurred liabilities solely to support Trinity’s projects, Mr Azizi could have immediately prevented further debts by directing Trinity to cease work and instructing Trinco not to enter into additional contracts.
The Debts Wholly or Partly Unsecured when the Loss or Damage was Suffered: Section 588M(1)(c)
A creditor suffers loss when not paid in accordance with its contractual entitlement. The High Court has not determined the relevant timing for assessing whether a debt was wholly or partly unsecured under section 588M(1)(c). Two approaches have been considered:
- One is that it is at the time the debt fell to be repaid in accordance with contractual entitlement; or
- The other is that it is at the time when it is necessary to determine the quantum of the loss or damage, which is at the time the section 588M claim is being resolved.
Brenton J adopted the latter approach, consistent with decisions: Quin v Vlahos [2021] VSCA 205 and Perrine v Carrello [2017] WASCA 15, holding that this interpretation is not plainly wrong.
The Quantum of Compensation
Brenton J assessed the debts for which the liquidator should compensation, to ensure that the section 588M compensation award reflected creditors’ net loss rather than the face value of all creditor claims. The Court excluded some alleged debts which were incurred after the administration. Key ‘excluded categories’ included payroll-tax assessments that were outside the contravention period. Brenton J adopted the approach in Quin v Vlahos [2021] VSCA 205 and Perrine v Carrello [2017] WASCA 15, determining the compensation at the date of judgment. It followed that the Court reduced the quantum of any security realisation. After these adjustments, the Court ordered Mr Azizi to pay $10,059,175.52.
Outcome
The Court found that Mr Azizi, though not formally appointed, was a de facto director of Trinco and was therefore liable under section 588M for insolvent trading. As all elements of the $588M were satisfied, the Court ordered Mr Azizi to pay $10,059,175.52 to Trinco as a debt owed to the company. This figure was reduced to exclude certain categories of debts, including some payroll tax liabilities, settlement deeds, and post-administration debts.
Key Takeaways
- A person may be a de facto director of a company, even if not formally appointed; this is especially so if they act in a top-level of management function.
- A de facto director has all of the duties of a formally appointed director, including the duty to prevent a company from incurring a debt if it is insolvent or incurring the debt would make it insolvent.
- Suspicion of insolvency is sufficient. A director need not conclude that the company is insolvent.
- For invoking the reasonable steps defence under section 588H(5), a good record of decisions and the reasoning for them and any steps taken to avoid insolvency should be kept.
Further Information
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